Fix Your Mortgage Rate For Life

If you're fed up with riding the interest-rate rollercoaster, then try a home loan which is fixed for 25 years. Here's what's on offer.

Thanks to five rate hikes in the past twelve months, the Bank of England's base rate has climbed from 4.50% a year to 5.75%. As you'd expect, mortgage rates have followed suit, as lenders increase their variable rates to maintain their profit margins.

However, it's not just capped, discounted, tracker and other variable rates that have risen. As the Bank's base rate has gone up, so too has the cost of fixed-rate loans. One consequence of higher fixed and variable rates is 'payment shock', which occurs when borrowers come off attractively priced loans, only to discover that replacements have become far more expensive.

For example, 1.3 million borrowers took out fixed-rate mortgages in 2005, when loan rates were considerably lower than they are now. The vast majority of these borrowers face a steep rate hike this year or next, when their annual interest rate could leap from, say, 4.5% to around 6%. Thus, these borrowers could see their monthly repayments rise by a third or more. Ouch!

One way to avoid payment shock is to plan ahead by budgeting for a two-percentage-point rise in your mortgage rate. In other words, make sure that your monthly repayments are still affordable if your loan rate moved up by 2%. Another way to avoid payment upsets is to fix your mortgage rate for a lengthy period, say, upwards of five years.

Indeed, it's possible to fix your mortgage rate throughout the life of your loan, simply by signing up to a 25-year fixed-rate deal.

Last month, Alistair Darling, the new Chancellor, announced that the government was exploring ways to increase the popularity of long-term fixed-rate mortgages. The Treasury believes that a move towards the European model of long-term fixed-rate borrowing will improve affordability and help curb the boom-bust cycle of UK house prices.

At present, only a tiny fraction of homeowners opt for a long-term fixed-rate mortgage. Indeed, our exclusive research found that fewer than one in a hundred users of The Fool's award-winning mortgage service took out a fixed-rate loan lasting more than ten years.

So, although long-term fixes have been around for years, they have failed to catch on, largely because they are more expensive than most short-term fixed and variable rates. Typically, the rates for long-term fixes are around 0.5% higher than those for two- or three-year deals.

Another problem for borrowers who seek the security of a 25-year fixed-rate mortgage is the shortage of deals in this category, as few fixes last more than ten years. However, this market is beginning to show signs of life, with 25-year fixes launched last week by Norwich & Peterborough BS, Yorkshire BS and Fool partner London & Country Mortgages. Here are the Best Buys in this category, courtesy of Fool.co.uk and financial researcher Moneyfacts:

Best Buy 25-year fixed-rate mortgages

Of course, taking out a 25-year fixed-rate mortgage will give you peace of mind, because your repayments will not increase over the life of your home loan.

However, it is also a gamble on long-term interest rates, so you could lose out if rates drop and remain low for long periods. Anything could happen over the next two or three decades, thanks to political and economic changes.

Then again, by taking out a lifelong fix, you won't have to worry about remortgaging every two or three years, which could save you thousands of pounds in arrangement, valuation and legal fees, not to mention a whole heap of hassle!

Finally, although your rate may be fixed for 25 years, your mortgage should be portable. Thus, in most cases, you should be able to take your fix with you when moving home. In addition, some lenders provide you with 'exit windows' when you can bail out of your fix without paying a hefty redemption penalty.

For more information on whether to fix for the long term, read To Fix Or Not To Fix?, The Fixed-Rate Mortgage Gamble and How Heavy Is Your Home Loan?

More: Want a happier home loan? Then try The Fool's award-winning, no-fee mortgage service!